Raising Wages Is the Right Thing to Do, and Doesn’t Have to Be Bad for Your Bottom Line

Executive Summary

The “working poor” are a growing problem in America — one that is increasingly embarrassing to the corporate elite. Business leaders who are morally inclined to do the right thing should and can play a stronger role in solving this problem by raising wages to a level where their employees’ earnings cover the cost of living. For business leaders operating in settings where profit margins are high and low-wage employees are a small driver of overall costs, doing the right thing morally is not even that risky. Some wage increases would even pay themselves by increasing productivity and reducing turnover — employees would be more motivated, less distracted with life problems, and less eager to find a better job. For those leaders compelled by the same moral argument but operating in businesses with low profit margins and a high percentage of low-wage employees, doing the right thing morally is still possible. But it requires a lot more work.

Jason Schneider

The “working poor” are a growing problem in America — one that is increasingly embarrassing to the corporate elite. Business leaders who are morally inclined to do the right thing should and can play a stronger role in solving this problem by raising wages to a level where their employees’ earnings cover the cost of living.

Jamie Dimon, CEO of JPMorgan Chase, was recently stumped in a U.S. House Financial Services Committee hearing when California Congresswoman Katie Porter asked him what advice he could give to a constituent — one of his own bank’s tellers, who makes $2,425 a month and lives with her daughter in a one-bedroom apartment with a $1,600 rent in Irvine. Food, utilities, childcare, and commuting cost about another $1,400, leaving her $567 short every month. Dimon had no good answer.

Yet Dimon is one of a number of corporate leaders — others include Warren Buffett, Ray Dalio, and Paul Tudor Jones — who have expressed public concern that the version of capitalism that has allowed them to be so successful is not sustainable for our society. The data are daunting. Between 1980 and 2014, while the pre-tax income doubled for the top 1% and tripled for the top 0.1%, there was little change for the bottom 50%. In 2017, more than 45 million Americans worked in occupations whose median wage was below $15 an hour. Although wages increases have finally been accelerating, 40% of Americans are living so close to the edge that they cannot absorb an unexpected $400 expense—not much, as car repairs or dental work go.

For business leaders operating in settings like that of JPMorgan Chase, where profit margins are high and low-wage employees are a small driver of overall costs, doing the right thing morally is not even that risky. Some wage increases would even pay themselves by increasing productivity and reducing turnover — employees would be more motivated, less distracted with life problems, and less eager to find a better job. For those leaders compelled by the same moral argument but operating in businesses with low profit margins and a high percentage of low-wage employees, doing the right thing morally is still possible. But it requires a lot more work.

When Doing the Right Thing Has Little Business Risk

During the last few years, several business leaders have substantially increased the minimum wages for their employees, citing both a moral imperative and a “business case.” In 2015, Mark Bertolini, CEO of Aetna Insurance, announced a minimum wage hike from $12 an hour to $16 an hour. It wasn’t right, he said, for a thriving Fortune 100 company to have employees on public assistance with their kids on Medicaid. Furthermore, he could justify “doing the right thing” economically: “Let’s look at all the potential benefits we can drive, hard and soft, as a result of this investment, put some numbers on them and stand back and say, ‘Is this a risk we are willing to take?’” He thought so.

And in 2016, Jamie Dimon himself announced that JPMorgan Chase would increase the minimum wage for 16,000 of its employees from $10.15 an hour to anywhere from $12 to $16 an hour, depending on where they worked. “It is the right thing to do,” he said, and it would also benefit the company by attracting and retaining talent. The wage increase was significant, although it clearly didn’t lift up everyone, including Rep. Porter’s constituent, to a living wage.

What these examples have in common, however, is that the company could already afford the raise. JPMorgan Chase’s increase affected only about 7% of its employees and the company had more than enough profit margin to afford it. So did Aetna.

When Doing the Right Thing Can Wipe Out Profits

But what happens when the company can’t easily afford a significant wage increase? For some companies, a 30% raise for their lowest-wage employees, like Aetna’s, could wipe out profitability, at least in the short term. Take retail, for example, the largest employer in the United States, where labor costs are around 10% of sales and the profit margins can be in single digits. Business conditions like this — high labor intensity and low profit margins — are where most of the working poor are; the 2017 median wage for the 8.7 million U.S. retail sales workers was $10.77 an hour.

Some retail leaders would like to do better by their low-wage employees. They are also being pushed from a competitive perspective: Minimum wages are increasing, labor markets are tight, and creating a compelling customer experience requires a motivated, capable, and stable workforce. Indeed, several retailers — including Amazon, Walmart, CVS, and Target — have announced wage increases since early 2018.

But when labor intensity and profit margin seem to forbid higher wages, how can they make the moral and competitive case work financially? The way out of this trap is to design jobs in a way that increases workers’ productivity and enables them to drive sales and lower costs. In short, you make it possible to pay workers more by making them worth more to your business. That, as you might surmise, requires a different leadership focus — a different view of what are the company’s most valuable assets and what investments they require.

Costco, for example, can offer a $15-an-hour minimum wage and pay store employees an average of about $22 an hour with generous benefits because it has made specific operating system design choices — such as offering fewer products and promotions, setting clear standards, and empowering employees to make decisions — which enable its employees to be highly productive and to contribute significantly to customer value.

Costco’s operating system also requires leadership with the following key features:

Humility — an acceptance that one cannot design everything from the top and that the best ideas to improve work come from people who do the work.

Faith in people — a deep belief that most people want to do a good job and be proud of their work.

A passion for operational excellence — to do all the mundane but important things really well. “If you are a big picture guy, you are not in the picture,” Costco co-founder Jim Sinegal told my students. “Retail is detail.” When he ran Costco, he spent about 200 days a year visiting stores. He focused on detail: how the products were displayed, how they were priced — always through the customers’ eyes.

Business leaders in tough settings like retail who would rather offer living wages than poverty-level wages should know that they can do so by redesigning their operations in a way that allows them to afford those wages without raising prices. This is hard work and you’ll have to make hard decisions. Are you the type of leader who is willing to take that on and to defend what you’re doing — to your board and analysts — financially, competitively, and morally?

As for Jamie Dimon, I hope he will further evaluate wages in his company and do the right thing, even if he has to do it the hard way with better-designed jobs.